All Aviation Articles By David Wyndham

Many years ago, our company founder, Al Conklin, sold a new twin-engine business aircraft to a very successful entrepreneur. He had established a bit of a rapport with the individual and, after the sale, asked him straight out, “How can you justify the cost of this airplane?” His reply? “What is the cost of a divorce?”

Business aircraft enable your passengers to manage their time in the most productive manner. They enable face-to-face contact within your company, with prospects and your customers. How to you measure the success of your aircraft in accomplishing this role for your company? Here are some places to start.

Key Employee Travel Time Saved. If the aircraft saves travel time, then how much time? Increased time spent traveling is decreased productive time or decreased rest/recuperation time. You should have some data and a good feel for when the time saved is worth the use of the business aircraft. How do you measure the worth of the time saved?

Time has value. If using the business aircraft saved three senior executives eight hours’ apiece, then the total time saved was 24 person-hours. If those hours were spent with a major customer, what is the value of that customer? At a minimum, what is the value of the executive’s time to the corporation? The executives' time is worth well over their salary and benefits, but this is a minimum value. Calculating the time saved should not be a big project for the flight department. It can be just another blank in the travel documentation. It can be estimated, tracked and reported on a regular basis.

Customer Travel. One study at UCLA indicated that up to 93 percent of communication effectiveness is determined by nonverbal cues. These cues can mean the success or failure of a contract negotiation or new business venture. Who are the company’s largest customers? How often do they receive visits from senior executives? How often does the company bring them to the corporate headquarters for meetings? Do you track this?

Getting new customers typically takes more effort than retaining the ones you have. Show up for the big presentation with a team of two or a team of seven? Is the business aircraft used to facilitate these meetings? Again, it should be easy to track what the business purpose is for the aircraft: new client visit, sales visit, engineering support, etc.

Travel Between Corporate Locations. Many companies have operating locations in hard to reach areas. One company that I’ve done a study for has four major operating locations is four non-airline-hub locations. The business aircraft keeps the senior executives at each of these locations connected in person with the headquarters. It also enables short-notice travel for a vital meeting. This company tracks the number of overnights executives spend away from their home office (or how many overnights were saved by the business aircraft). Another client uses a helicopter to visit multiple job-sites that cannot be done in a day via ground transport.

Non-tangible Rewards. Many of the rewards we value are non-monetary. The buyer at the beginning of this article had not really estimated the cost of getting a divorce in dollars, but in the loss of a valued relationship with his wife and family. Turnover in key positions means a loss of continuity, a loss of the team’s effectiveness and time spend searching for the new executive that cannot be spent elsewhere. The business aircraft saves on the wear and tear of travel and yes, enables the spouse to make it home for the child’s soccer game on Friday afternoon. Zappos founder, Tony Hsieh is well known for his rise to the top. He’s well known for his corporate culture of happiness. Tony Hsieh also uses business aircraft.

There are many uses for the business aircraft. They all center around making the most effective use of the time available. There needs to be some measures of how the business aircraft is contributing to the success of your company’s mission. What to measures are depend on your use of the business aircraft.

Save for a helicopter, business aviation happens exclusively at the airport, correct? Wrong. Aviation happens at the airport, business happens everywhere. To be effective, a business aviation manager needs to be wherever the company business is conducted. Having the ear of the CEO is great. But, the average length of tenure of a Fortune 500 CEO is 4.6 years. What happens when there is a new CEO?

No Plane No Gain has great resources and user stories about the value of business aviation. We need that support, but it is mostly advocacy for business aviation directed to people like the press or local community. But what about within your own company? How is the business aircraft viewed? As an essential business tool or as a royal barge?

A recent client was facing a second round of layoffs. Their sales were down. They operated a business aircraft to access many of their distant operating locations. None of those locations could be easily reached by commercial air. A review of their use of the aircraft revealed that this aircraft was effectively and efficiently being used to manage their operations. But they were acutely aware that if their employees were facing a layoff and saw the senior leadership climbing aboard the corporate jet, that could have a negative impression. The board was concerned and fortunately, I provided them with the report supporting continued use of the business aircraft as the most efficient means of transporting the senior leadership. But still remaining was the optics.

Business aviation needs to be marketed and sold within the companies it serves. One way this can be done is for the aviation manager to be directly involved downtown. That's where the business is. The more successful business aviation departments have that access to the senior leadership through regular contact at the corporate locations.

In spending time at the corporate headquarters, the aviation manager can be seen as a team member, part of the company. They also have the opportunity to soft-sell the value of the business aircraft to senior leadership, and even their staffers and support employees. The aviation manager can be proactive in anticipating the future air travel needs, and also have more of an impact into the policies and use of the business aircraft.

I cannot say how many times I have heard this from the department head or Senior VP who has the flight department as part of their responsibilities: "I don't use the aircraft myself, and I really don't understand it. But, the CEO is happy." Does any aviation manager want their immediate boss not knowing what value they add to the corporation? CEO's will come and go. Board of Directors get new members with new ideas and opinions. Rather than aviation being politically connected to one CEO, it is far better in the long run to be connected to the corporation's mission and goals.

If you are not there now, start with a review of your corporation's vision and mission statement. Then develop ones for aviation that directly tie into the corporate goals. Run them by your senior leadership and users for inputs. Get this in writing and, along with the rules for use of the aircraft, have it for the CEO or other senior leader signature. Spend time downtown. It may not seem like much at first, but it can pay off for the aviation department, and corporation, in the long run.

As 2014 rolls into the Northeast with a big snow storm, this is as good a time as any to look ahead while waiting for the snow plow. A big part of looking ahead is your aircraft's annual operating budget.

If you operate on a calendar budget, you should have already completed your aircraft operating budget for the year. If this is the last time you look at your budget until the end of the year, you are not taking advantage of the work you have done.

A budget is a best estimate looking forward at what you think expenses will be. As such, you made a number of assumptions regarding things like utilization, fuel costs, etc that factor into those costs. As you advance through the year, you will learn how accurate those assumptions were. Is your budget capped? If you were planning on fuel prices remaining stable, what happens if they increase? Where does the money come from if you exceed your allotted budget amounts?

Maintenance costs will depend on the utilization. What if, having planned on 360 annual hours, which puts the next major inspection into 2015, you end up flying 400? If a major maintenance bill comes due earlier than expected, will you be ready for this? You should be plotting major, know expenses, forward at least two to three years. Things like engine overhauls, paint & interior, major checks, hangar rents, even training and insurance costs are coming on a predictable schedule.

Your budget should be reviewed and updated as the year progresses. Planned versus actual should be a standard metric. If you have a tight budget with little room for overages, you'd better know early if there will be unforeseen issues. As you start seeing variances in your budget, have the explanation ready as to why. No one really knows what the price of fuel will be next month, let alone at the end of the year. When that cost of fuel changes from what you anticipated, note it and any possible explanations if you know of them.

The key thing is to track and report your costs in detail. Then when there are small variances in the budget actuals, you can see them (hopefully) before they become a major event. Save for a significant unscheduled maintenance event, this is doable. Then you need to communicate to those with the money what is going on, and what actions that you recommend. If at 360 hours, the major inspection would be due in January 2015, but flying jumps to 400 annual hours: (1) major expenses in outlying years should already be noted and (2) the inspection costs need to be planned for well in advance. Tracking, reporting and understanding your costs are necessary to avoid financial surprises.

Budgets should be a financial tool that you use to manage the fiscal resources of your operation. It should not be a once and done exercise. Used appropriately, a budget should provide you with operating cost metrics that you can use to measure and manage your aircraft throughout the year.

There is less than a month left in 2013. For many businesses, this is a time to look at yearend capital purchases. Buying in December can get a business a nice tax deduction for the year while spending the money as late as December 31. With new business aircraft, you commonly see strong sales and deliveries in the last quarter, December especially. To see if this makes sense from a tax perspective, consult an aviation tax authority, not me. Here are three tips if you find yourself in an airplane-buying mood.

Tip #1. Take the time to plan on what aircraft to acquire. If this article is your first inkling that you want to buy, wait until next year. Buying on impulse often leaves you disappointed. What looked or sounded great in the moment can turn out not to be what you thought you were getting.

When looking at what aircraft to acquire, be objective. Objective means choosing criteria that can be measured. Objective criteria should also be specific to the mission assigned to the aircraft. That way you can avoid over-buying - getting far too much aircraft than you really need. If you are clear about what you need, it is easier to set up your criteria. “Go anywhere, anytime” might set you up for a supersonic tilt-rotor amphibian, but can you afford that? Make sure that whatever aircraft you acquire, that it meets objective criteria for meeting your business’s air transportation needs.

Tip #2. Get your acquisition team together. To get the tax deduction for a business aircraft for 2013, you will generally need to take delivery and place the aircraft into service by year’s end. Ownership involves the title, insurance, sales tax planning, and possibly financing. The bigger the aircraft, the more complexity these deals seem to have. Make sure that your team: legal, tax, insurance, finance, etc. are informed and prepared in advance. Note: in advance is not the day prior to delivery. These professionals are quite busy in December.

Tip #3. Evaluate all of the costs involved in the owning, and operating, of the proposed aircraft. You may be getting a sizeable discount on the aircraft you are looking to purchase, but if it is going to eat up a lot of money in operating expenses, then the deal may not be the best one financially. Look at the total Life Cycle Costs: acquisition, operating costs, finance or lease costs, and potential resale value after a period of use.

Being able to get another tax deduction in 2013 with the acquisition of an aircraft may be great in 2013, but may not be as helpful to your company in 2014 and beyond. As part of the aircraft life cycle costing, you may want to look at your company’s projected profits over the next few years. 2013 may be a profitable year (congratulations), but having a larger write-off next year may be better.

Bonus tip #4. Good things come to those who will wait. When the new aircraft manufacturer makes a lot of year-end deliveries, many of them will come with a trade-in. So Early 2014 should see these same folks with some good deals on pre-owned aircraft. Maybe, just maybe, the deal on the older aircraft might exceed to deal on the new model.

I did not see any “Black Friday” deals on new aircraft. But, depending on the manufacturer and model, there may be some great deals to be had prior to yearend. If you have planned for this in advance, you should be able to make things happen. P.S. - cash is king here as the deal would be guaranteed to close.

At the recent NBAA convention in Las Vegas, I sat in on several briefings about the state of aircraft sales and residual values. It was unanimous that older aircraft are not selling. No news there. It's been that way since 2008. What was interesting is the speakers' definition of "old."

I've been going with older than 15 years as "old" in terms of the ability to sell at a reasonable price within a reasonable amount of time. Age 15 also works with getting financing: The Aircraft Age + Length of Lease/Loan should not exceed 20 years. Age 15 allows for a five year financial deal. It seems like the new "old" is younger than that. And no, we can blame it on the Millennials. Blame it on the economic booms of the late 1990s and again in the mid-2000s.

An "old" business airplane is now older than age 10 in terms of maintaining a residual value and being sellable.

Glancing through the GAMA shipment database by year, business aviation saw significant increases in sales and deliveries during the past 15 years. Many manufacturers saw their sales double, peaking in delivery backlog in about 2008. Thus, there are a large number of relatively recent vintage airplanes available that are in the 5 to 15 year group, and especially aged 5 to 10.

The future air navigation systems that have been developing are in place or will be in the next decade. New or nearly new aircraft are either capable of using the full airspace, or can be easily upgraded. Older aircraft may not be so easily updated, especially older business jets that need the upper altitudes for efficient flight.

Older business aircraft, especially jets, have operating costs significantly higher than their new equivalents. A second or third overhaul on most turbine engines will be very costly due to retirement components within the engine. Unscheduled maintenance is also much higher for these older aircraft.

Lastly, emerging markets outside the US can, and do, purchase mostly new or newer aircraft. Developing nations are adopting the EASA regulations as it relates to aircraft aging issues. Some even place an age limit on imported aircraft.

So we have a large number of recently produced aircraft, many with updated avionic systems, that can be purchased for quite reasonable prices. Financial institutions have the money to lend, provided the credit is excellent. The 20 or 30-year old airplane costly to maintain, and sending them to a developing nation to sell isn't viable. These aircraft are just not selling. Let’s take a look at an example.

Jet

Years produced

Percent Fleet For Sale

Average Days Listed For Sale

Gulfstream GIII

1979-1987

18%

828

Gulfstream GIVSP

1992-2002

13.56%

375

Gulfstream G450

2005-current

7%

239

You can buy a used GIII for under $1 million. But almost no one wants one even at that price. Newer GIVSPs and especially the G450 have a market.

One of the speakers referred to the oldest business aircraft as "Jurassic Jets." They are from a bygone era of cheap gas. They are not selling and the financial institutions do not want them on their books. From what the speakers say, and I agree, this is not going to change. Many of these aircraft are with their last owner.